You should turn it on. This is the biggest step you can take to securing your Bitcoins. It is vital.
It encrypts your wallet. From the user point of view it is like adding a password to your wallet (everytime you send money, you'll have to enter a password). But what it really does is more powerful than just a simple password.
It uses that password (called a key) to scramble your wallet file and make it completely unreadable to anyone who lacks the key to it.
(See also: https://en.wikipedia.org/wiki/Encryption